Petrochemical supply constraints prevail in China amid demand recovery

Author: Felicia Loo

2021/03/17

SINGAPORE (ICIS)--Supply constraints prevail in China’s petrochemical markets, proving particularly challenging for polymers, which are dogged by limited domestic production, plant shutdowns in the Middle East and a global scramble for cargoes.

The heat is up as demand recovery takes place on receding threat of the coronavirus pandemic amid the worldwide roll-out of vaccines, although the pace of inoculation differs from country to country.

Besides polymers, a similar story unfolds in other Chinese petrochemicals including base oils, vinyl acetate monomer (VAM), n-butanol (NBA), butyl acrylate (butyl-A) and bisphenol A (BPA).

China’s petrochemical markets extended their strong gains in February, chiefly on continuous tight supply, with the ICIS China Price Index surging 22% from end-January to 1,331.59 on 26 February.

"With easing coronavirus pandemic recently, the recovery of global economy and trade will boost demand for polyolefins," said ICIS senior analyst Joey Zhou.

"Manufacturing factories, leisure and hospitality sectors have re-opened. We expect PP [polypropylene] demand from construction, household appliances, automotive, healthcare and FMCG [fast-moving consumer goods] industries will increase in Asia, including China," she added.

CHINA STIMULUS FUELS STRONG DEMAND
Beijing is expected to introduce a stimulus package in conjunction with the Chinese Communist Party's 100th year.

It begs the question on what this would bring to the table.

"For China's demand, as 2021 is the starting year of ‘14th five-year plan’, we expect more stimulus policy will be published and benefit PP demand," Zhou elucidated.

Beijing's plan for 2021-2025 - largely of a new urbanization strategy - will ultimately boost industries including construction, real estate and automotive, hence, encourage demand for polymers.

As things stand, China’s investments on real estate development in January-February 2021 increased a steep 38.3% year on year to yuan (CNY) 1.4tr ($215bn), data from the National Bureau of Statistics (NBS) showed.

The fast growth was mainly a result of a low base last year when the pandemic dragged down all business activities.

Compared with the first two months of 2019 (pre-pandemic), the 2021 data was up 15.7%.

Separately, China’s industrial output in the first two months of 2021 spiked by 35.1%, with chemical raw material and finished products output posting a 30.8% increase.

The latest numbers indicate good recovery momentum for the world’s second-biggest economy, according to NBS.

In the automotive industry, vehicles sales in China in February 2021 reached 1.46m units, a near fivefold increase from 310,000 units sold in the same month in 2020, industry data showed.

Production for the month stood at 1.5m units, more than five times higher compared with the previous corresponding period.

China is the biggest automotive market in the world.

Overall economic growth continues to be driven by government investments in infrastructure, including renewable energy, residential projects and 5G networks.

According to government-backed thinktank, the China Electronic Information Industry Development (CCID), the country is expected to spend CNY10tr ($1.4tr) on new infrastructure projects between 2020-25.

China had been investing in construction overseas, especially in emerging markets as part of its Belt and Road Initiative.

However, this died back sharply in 2020, due in part both to global politics and fears over debt levels. China is instead now focusing on a digital silk road, to improve IT networks.

TIGHT GLOBAL SUPPLY DRIVES UP PRICES
A strong recovery in China’s petrochemical demand has coincided with a severe global tightening of supply since the start of the year.

Overseas polyethylene (PE) suppliers mostly shipped their cargoes to other markets, where netbacks are better.

China’s domestic PE supply would decrease due to plant turnarounds while import supply would remain short amid a closed arbitrage window.

Local producers Sinopec Yanshan and Sinopec Maoming are expected to shut their PE units late this month.

Producers in North America and the Middle East - the world’s two major net PE exporters - have scheduled maintenance at their plants in February and March.

With the global economy recovering, demand in other regions and countries is expected to increase; some overseas suppliers prefer to sell their limited cargoes to places where the prices are higher.

Given soaring PE and PP prices in Europe, the continent is now looking attractive to exporters.

Now European supply is tight - short even - on the continuing lack of imports, production issues, reduced refinery runs and because suppliers are preparing for upcoming maintenance in the second quarter.

Some of the cracker shutdowns have been delayed from 2020, and there has not been the usual build-up of stock ahead of these.

"From the supply side, the imbalance between China and other regions is more obvious. In Q1, due to outages in the US, Europe and maintenances in Middle East, supply in oversea markets is extremely tight," Zhou said.

"Asian PP suppliers, including Chinese PP producers, are eager to sell PP cargoes to those markets, such as Turkey, and such tightness is expected to last until April and May," she opined.

Asia’s PE margins from all processes increased in the week ended 12 March due to higher prices.

For PP, few offers from overseas suppliers were quoted in the Chinese market, which is currently has the lowest prices in the world. Local producers are opting to export cargoes to generate better netbacks.

Tight overseas PP supply is expected to ease late in the second quarter, while domestic supply in both east and south China has tightened because of increased exports.

In the base oils market, China faces further shortage in import supply in Q2 amid strong demand from downstream lubricant producers.

Domestic prices of Group III base oils have been surging in the past six months, and were last assessed at highs not seen since 2014, according to ICIS data.

Base oils end-user demand would remain strong throughout March.

In the vinyl acetate market (VAM) market, spot prices have been rising on the back of severe capacity losses in China and overseas amid healthy downstream demand. Supply may remain tight in the near term.

For n-butanol (NBA), China's domestic prices have hit a 13-year high and downstream butyl-A soared close to a 10-year high, due to tight supply caused by turnarounds in Asia as well as force majeure that remained in place at plants overseas.

For butyl-A, supply is expected to tighten further due to upcoming heavy turnarounds at domestic plants.

A number of butyl-A plants in Asia, including China, are scheduled for maintenance in March - involving 520,000 tonnes/year of capacity - with production loss pegged at around 36,000 tonnes, according to ICIS Supply & Demand Database.

In the bisphenol-A (BPA) market, spot import market sentiment in China was bolstered by good demand and supply constraints.

Global consumption of downstream epoxy resins is being fueled by economic recovery a year into the pandemic.

Good BPA demand from this sector is likely to persist, particularly in China, where epoxy resins go into the production of wind turbines which enjoy government subsidies.

For the whole of Asia, epoxy resins demand has been robust while supply is tight as Kukdo Chemicals' plant in China has remained shut since October 2020.

Analysis article by Felicia Loo

Photo: Busy Lianyungang Port in Jiangsu, China - 08 Mar 2021 (Source: Shutterstock)

Additional reporting by Fanny Zhang, Aviva Hu, Whitney Shi, Anna Xiang, Sikee Shi and Julia Tan